Using resources like the CFPB guide to auto loans before plunging into making a big purchase, such as a vehicle in this case, as well as doing a little thinking and research can save you a lot of money. Of course, you’ll want to shop around to get the best price on a new or used vehicle, but did you know that if you’re planning to finance your vehicle, you also can save a lot of money by shopping around for and negotiating the best rates on your auto loan?
One great resource we found is the auto loan guide from the Consumer Financial Protection Bureau.
Get or Refinance Your Auto Loan
CFPB Guide To Auto Loans
Determine Your Budget
If you’re planning to finance your vehicle purchase, you’ve probably thought about how much you want to spend per month, but it’s important to determine if that number is realistic.
The guide recommends first having a household budget that covers all of your expenses so you realize how a new vehicle fits into that budget. You don’t want to get started with monthly car payments then realize you’ve gotten in over your head.
In determining what kind of vehicle fits in your budget, you can compare prices and features through such resources as Consumer Reports, Kelley Blue Book, Edmunds and NADA Guides, which are available online or at your local library.
You might think you can stick within your monthly budget by extending the life of your loan, but you could add thousands of dollars to the total cost of the vehicle with this approach. You’ll also risk having negative equity during the course of the loan, which means the vehicle is worth less than you still owe. This means if something changes in your financial situation and you want to sell the vehicle early, you would still owe more than the selling price.
Don’t forget to factor in the total cost of ownership. When you buy the car, you’ll have other costs such as sales tax, finance charges, registration fees. And through the life of the vehicle you’ll have ongoing costs, such as insurance, gasoline, annual registration, maintenance and repairs.
Finally, you want to factor in the resale value of your purchase. All vehicles lose value during their lifetime, some faster than others, which you can learn more about from the resources we mentioned above.
Get or Refinance Your Auto Loan
Sources of Auto Financing
Once you’ve gotten a pretty good handle on your budget for the vehicle, you can begin considering your financing options. The CFPB guide to auto loans discusses the three basic types of financing:
- Financing through a bank, credit union or other financial institution. Many consumers feel comfortable going through their local bank because they already are familiar with them. If you are a member of a credit union or have the ability to join one, you likely will find competitive interest rates there. You also can find great rates through online banks these days because they don’t have to spend so much on brick and mortar expenses, so they can offer competitive rates.
- Financing arranged through the dealer. Many consumers will just assume this is the way to go and not shop around first. But these companies are under no pressure to give you their best rates unless you’ve done some homework first and come in with the ability to negotiate a better rate.
- “Buy Here, Pay Here” dealer financing. Consumers with poor or no credit may feel like this is the only option available to them. You will be saddled with higher interest rates and aggressive collection techniques if you go this route.
The guide also offers information about using a co-signer if you don’t have the best credit. This can be a relative or a friend who has excellent credit. The risk for them is they will be on the hook if you fail to make payments or it can damage their credit rating, but it’s a way for you to get the better deal on interest rates and terms.
The CFPB guide to auto loans also provides information on leasing a vehicle, which is another popular option for those who qualify. Under a lease, you don’t take ownership of the vehicle, although some leases include a balloon payment option where you pay a reduced cost of the car at the end of the lease. Leases often limit how many miles you can drive each year, as well, so that could be a factor if you drive a lot.